3/22/23, 10:36 AM UBS Got Credit Suisse for Almost Nothing - Bloomberg

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Live Now Markets Economics Industries Technology Politics Wealth Pursuits Opinion Businessweek Equality More

Opinion Matt Levine

UBS Got Credit Suisse for Almost

Nothing
Also AT1s working as designed and a weird Bitcoin bet.

By Matt Levine LIVE ON BLOOMBERG

Watch Live TV
March 20, 2023, 6:02 PM UTC
Listen to Live Radio

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Credit Suisse
It is sometimes useful to think that the shareholders of a
bank are not its owners; they are just renting it from its
Gift this article creditors. Schematically, a bank borrows a bunch of
money from depositors and other creditors and uses the
Follow the authors money to make loans and buy securities and do other
risky investments. If the investments end up being worth
more than the deposits, the shareholders keep what’s
left. If the investments end up being worth less than the
deposits then, uh, that’s bad. Then the shareholders
Matt Levine is a don’t own the bank anymore, for one thing, but that’s
Bloomberg Opinion
columnist covering really the least of your problems. The real problem is
finance. He was an that the depositors can’t lose money; the banking system
editor of Dealbreaker,
an investment banker relies on bank deposits being usable as money. “Banks
at Goldman Sachs, a are speculative investment funds grafted on top of critical
mergers and
acquisitions lawyer at infrastructure,” Matt Klein wrote last week. The liabilities
Wachtell, Lipton,
Rosen & Katz, and a
(deposits, etc.) are the critical infrastructure; the assets
clerk for the U.S. Court (loans, securities) are the speculative investment fund.
of Appeals for the 3rd
Circuit. @matt_levine
The bank is a machine for turning safe deposits into risky

+ Get alerts for

investments. If the investments end up being worth less
Matt Levine than the deposits, then regulators and central banks step
in and there is some sort of rushed rescue to make sure
In this article that the depositors still get paid. 
CSGN
CREDIT SUISS-REG One important consequence of this is that the equity of
0.85 CHF the bank — the shareholders’ ownership stake — is just a
+0.03 +3.16%
tiny sliver resting on top of an enormous iceberg of
https://archive.vn/Rd5WF 1/17
3/22/23, 10:36 AM UBS Got Credit Suisse for Almost Nothing - Bloomberg

UBSG liabilities. In a good profitable conservative bank, there

UBS GROUP AG
might be $100 of assets, $90 of liabilities and thus $10 of
18.78 CHF
equity. The liabilities are certain and knowable, things
Open
like deposits that really need to be paid back at 100 cents
on the dollar. 1 The assets are risky and variable, and
their valuation is a bit of a guess: They include securities
with volatile market prices, weird derivatives that are
hard to value, and business loans with uncertain
probabilities of being paid back. The bank applies some
accounting conventions and makes some guesses and
comes up with a value of $100 for its assets, but there is a
range of uncertainty around that number.

And because the equity is only

More from
like 10% of the assets, if the
Bloomberg
asset valuation is off by 10%,
Opinion
then there is no more equity,
Trump’s Stormy and that’s bad. The value of the
Weather Could Be
DeSantis’s Ray of bank’s equity
Sunshine is extremely sensitive to the
Schizophrenia Drug value of its assets, because the
May Offer Much- bank is so leveraged. I wrote
Needed Progress
once that “a bank is a
UBS Saved Credit collection of reasonable
Suisse. Now for the
Bad News guesses about valuation. It is a
purely statistical process. There
To Save the Amazon,
is no objective reality. At best,
Lula Must Think Like
a Capitalist there is a probability
distribution, a reason to reject
the null hypothesis with some level of confidence.” If the
bank reports $100 of assets and $90 of liabilities,
then probably its assets are worth more than its liabilities,
but you can’t really be sure. There is a cloud of
probabilities, and $100 is in that cloud, but so are other
numbers. Some of the other numbers are bad.

And most of the time the bank bops along like this, in its
cloud of probabilities. But occasionally a thing will
happen to collapse the probabilities and force it to find a
real number. Occasionally a bank will have to, in effect,
sell all its assets over a weekend. Often the thing that
causes this is bad: a bank run, a loss of confidence, an
emergency. When this happens, the assets will probably
sell at a discount. If the discount is more than about 10%
— more than the equity cushion — then the shareholders
get nothing. If you are in the sort of emergency that
requires you to sell all of your assets over a weekend, it is

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3/22/23, 10:36 AM UBS Got Credit Suisse for Almost Nothing - Bloomberg

arguably a little surprising to do better than a 10%

discount.

Credit Suisse Group AG filed its 2022 annual report last

week. It reported about 531 billion Swiss francs of assets
and about CHF 486 billion of liabilities, leaving about CHF
45 billion of shareholders’ equity (about 8.5% of assets).
When it filed the report last week, its stock was trading at
about CHF 2.24 per share, for a total market value of the
stock of about CHF 9 billion (about $9.7 billion).

One way to put this is that the market thought the stock
was worth 20% of its book value. 2 But another, more
useful way to put it is that the market thought that
the assets were worth 93.2% of their book value: Credit
Suisse’s CHF 486 billion of liabilities were real enough, so
if the market priced the equity at CHF 9 billion then that
implicitly meant that it valued the assets at about CHF
495 billion. The market thought that the reported asset
value was off by 6.8%. But if the reported asset value was
instead off by 8.5%, the stock would be worthless. The
cushion was very very thin.

It kept getting thinner. Last Friday, the stock closed at

CHF 1.86 per share, for a market value of CHF 7.4 billion.
And over the weekend, Swiss authorities forced through a
merger of Credit Suisse and UBS Group AG. Here is UBS’s
statement on the deal:

UBS Chairman Colm Kelleher said: “This acquisition is

attractive for UBS shareholders but, let us be clear, as
far as Credit Suisse is concerned, this is an emergency
rescue.”

And Credit Suisse’s:

Axel P. Lehmann, Chairman of the Board of Directors

of Credit Suisse said: “Given recent extraordinary and
unprecedented circumstances, the announced merger
represents the best available outcome. This has been
an extremely challenging time for Credit Suisse and
while the team has worked tirelessly to address many
significant legacy issues and execute on its new
strategy, we are forced to reach a solution today that
provides a durable outcome.”

In deals like this, it is customary for the shareholders of

the selling bank to get something, not so much because

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3/22/23, 10:36 AM UBS Got Credit Suisse for Almost Nothing - Bloomberg

their shares are worth much but because it is technically

a voluntary deal, a merger between a willing buyer and a
willing seller, and it is hard for the board of directors of
the selling company to say to their shareholders “hey we
negotiated the best possible price for you, which is zero.”
This is only technically true, though, and you can tell
from Lehmann’s statement that Credit Suisse was not
exactly a willing seller. It was barely even involved in the
deal: “[Credit Suisse Chief Executive Officer
Ulrich] Koerner and the rest of the Credit Suisse
management team were marginalized as emergency
weekend talks — led by Swiss National
Bank President Thomas Jordan — to sell the group to UBS
gathered pace,” reports Bloomberg.  

But there is a payment, in stock, of one UBS share for

every 22.48 Credit Suisse shares. UBS closed on Friday at
CHF 17.11 per share, making the deal worth about CHF
0.76 per Credit Suisse share, or about CHF 3 billion total,
down about 60% from Friday’s close. I have previously
described the customary payment for equity in deals like
this as “a Snickers bar,” and given that benchmark Credit
Suisse drove a surprisingly hard bargain. Bloomberg
again:

When the terms of the initial UBS offer — which valued

its rival at just 1 billion francs — landed on Sunday
morning, the Credit Suisse managers were outraged.
The price tag was seen as derisory for a bank that had
a market cap of $8 billion at the close on Friday.
Shareholders would be wiped out, managers argued.

Saudi National Bank — the Swiss bank’s largest

shareholder — urged Credit Suisse to reject the offer.
Calls went out from Credit Suisse to various
institutions, including Deutsche Bank AG, in a last-
ditch attempt to find an alternative. But the
complexity and timeframe meant there were no
takers. A full sale to UBS was the only option. That
triggered a final round of back-and-forth which lifted
the price to 0.76 francs per share. That's 99% lower
than Credit Suisse's peak share price.

You can, on the internet, find various expressions of

astonishment that a bank as old and important as Credit
Suisse turned out to be worth only $3 billion. 3 But this
is, I think, the wrong way to look at it. Credit Suisse is not
worth $3 billion; it is worth half a trillion dollars, more or

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3/22/23, 10:36 AM UBS Got Credit Suisse for Almost Nothing - Bloomberg

less. 4 It's just that virtually all of that value — more

than 99% of it — belongs to its creditors. UBS will take
over Credit Suisse’s hundreds of billions of assets and use
them to pay Credit Suisse’s hundreds of billions of
liabilities, and there's the tiniest sliver — about $3 billion
— left for its shareholders. That $3 billion is pretty much
rounding error on the value of Credit Suisse; it could just
as well have been $5 billion, or $1 billion, or a Toblerone
bar. The value and mechanics of this deal don’t depend
that much on the price for the equity, as you can tell by
the fact that UBS tripled that price in the course of a few
hours. 

It really could just as well have been zero, but it is polite

to give the shareholders something, a little consolation
prize on their way out the door. The dynamics are:

1. You want shareholders to get something so that the

board of Credit Suisse can feel okay about agreeing to
the deal, rather than making trouble and trying to
hold out for something better. 

2. You want shareholders to get something so that they

don’t make legal trouble, trying to find some legal way
to block the deal. (My Bloomberg Opinion colleague
Shuli Ren writes: “Regulators might have just given
Credit Suisse’s equity owners some sweeteners so
they don’t go to court and overturn the merger.”)

3. You want shareholders to get something so that they

are more willing to support the combined bank, and
the banking system generally, after the merger. If you
make Saudi National Bank and other big holders feel
like they have been taken care of, even a little bit
— even with 90% losses — they might be a bit more
willing to buy bank shares in the future, and it does
feel like banks are going to be selling a lot of shares in
the future.

4. You want shareholders to get something because

the employees often own a lot of shares, and you need
them to keep coming to work, and zeroing them is
bad for morale. Not that a 90% haircut isn’t, but 100%
is worse.

Similarly, it is normally a requirement in mergers for the

selling shareholders to get to vote on the deal: They own
the company, after all, and it can’t be bought from them
without their permission. But in a distressed bank merger
it is silly to pretend that the shareholders own the

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company, and nobody did. “Pursuant to the emergency

ordinance which is being issued by the Swiss Federal
Council,” says Credit Suisse, “the merger can be
implemented without approval of the shareholders.” 

The upshot of this for UBS is not that it paid CHF 3 billion
to buy its historic competitor. The upshot of this is that it
has assumed hundreds of billions of francs of liabilities,
and taken on a bunch of assets that are probably worth
more than that, but it’s hard to tell over a weekend, or
ever really. Fortunately it got a discount:

[UBS CEO] Ralph Hamers … and his team will have

plenty to work through as they consider which
businesses and people to keep, alter or jettison. But
he’ll have 56 billion francs of so-called badwill to help
cover any writedowns, as well as 9 billion francs of
guarantees from the Swiss government to take on
certain losses. And the firm can access a huge liquidity
line from the central bank. 

The badwill is the difference between the price that UBS

paid for the assets and their book value. In Credit Suisse’s
accounting, it had CHF 531 billion of assets as of Dec. 31;
UBS effectively bought them for CHF 473 billion. 5 If
Credit Suisse’s valuation was too high by 10%, then UBS
still makes out okay. 

Of course banks aren’t allowed to operate with too thin a

sliver of equity, and UBS will have to make sure that its
capital ratios are high enough to support the new much
larger bank. After the deal, “the bank remains capitalized
well above its target of 13%,” UBS announced, while Swiss
regulators announced that “the takeover will result in a
larger bank, for which the current regulations require
higher capital buffers,” but they “will grant appropriate
transitional periods for these to be built up.” Now UBS
owns Credit Suisse; it would like to be able to hang onto
it.

AT1s
After the 2008 financial crisis, European banks issued a
lot of what are called “additional tier 1 capital securities,”
or “contingent convertibles,” or AT1s or CoCos. The way
an AT1 works is like this:

1. It is a bond, has a fixed face amount, and pays regular

interest. 

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2. It is perpetual — the bank never has to pay it back

— but the bank can pay it back after five years, and
generally does.

3. If the bank’s common equity tier 1 capital ratio — a

measure of its regulatory capital — falls below 7%,
then the AT1 is written down to zero: It never needs to
be paid back; it just goes away completely.

This — a “7% trigger permanent write-down AT1” — is not

the only way for an AT1 to work, though it is the way that
Credit Suisse’s AT1s worked. Some AT1s have different
triggers. Some AT1s convert into common stock when the
trigger is hit, instead of being written down to zero;
others are temporarily written down (they stop paying
interest) when the trigger is hit, but can bounce back if
the equity recovers. (Here is a 2013 primer on CoCos
from the Bank for International Settlements.) 

These securities are, basically, a trick. To investors, they

seem like bonds: They pay interest, get paid back in five
years, feel pretty safe. To regulators, they seem like
equity: If the bank runs into trouble, it can raise capital
by zeroing the AT1s. If investors think they are bonds and
regulators think they are equity, somebody is wrong. The
investors are wrong.

In particular, investors seem to think that AT1s

are senior to equity, and that the common stock needs to
go to zero before the AT1s suffer any losses. But this is not
quite right. You can tell because the whole point of the
AT1s is that they go to zero if the common equity tier 1
capital ratio falls below 7%. Like, imagine a bank:

It has $1 billion of assets (also $1 billion of regulatory

risk-weighted assets). 6

It has $100 million of common equity (also $100

million of regulatory common equity tier 1 capital).

It has a 10% CET1 capital ratio.

It also has $50 million of AT1s with a 7% write-down

trigger, and $850 million of more senior liabilities.

This bank runs into trouble and the value of its assets falls
to $950 million. What happens? Well, under the very
straightforward terms of the AT1s — not some weird fine
print in the back of the prospectus, but right in the name
“7% CET1 trigger write-down AT1” — this is what happens:

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It has $950 million of assets and $50 million of

common equity, for a CET1 ratio of 5.3%.

This is below 7%, so the AT1s are triggered and written

down to zero.

Now it has $950 million of assets, $850 million of

liabilities, and thus $100 million of shareholders’
equity.

Now it has a CET1 ratio of 10.5%: The writedown of the

AT1s has restored the bank’s equity capital ratios.

This, again, is very explicitly the whole thing that the AT1
is supposed to do, this is its main function, this is the AT1
working exactly as advertised. But notice that in this
simple example the bank has $950 million of assets, $850
million of liabilities and $100 million of shareholders’
equity. This means that the common stock still has value.
The common shareholders still own shares worth $100
million, even as the AT1s are now permanently worth
zero.

The AT1s are junior to the common stock. Not all the time,
and there are scenarios (instant descent into bankruptcy)
where the AT1s get paid ahead of the common. But the
most basic function of the AT1 is to go to zero while the
bank is a going concern with positive equity value,
meaning that its function is to go to zero before the
common stock does.

Credit Suisse has issued a bunch of AT1s over the years; as

of last week it had about CHF 16 billion outstanding. Here
is a prospectus for one of them, a $2 billion US dollar 7.5%
AT1 issued in 2018. “7.500 per cent. Perpetual Tier 1
Contingent Write-down Capital Notes,” they are called.

In UBS’s deal to buy Credit Suisse, shareholders are

getting something (about CHF 3 billion worth of Credit
Suisse shares) and Credit Suisse’s AT1 holders are getting
nothing: The Credit Suisse AT1 securities are getting
zeroed. This is not, to be clear, exactly because Credit
Suisse’s CET1 capital fell below 7%; instead, there is a
separate clause of the AT1s allowing them to be zeroed if
the bank’s regulator decides that zeroing them is “an
essential requirement to prevent CSG from becoming
insolvent, bankrupt or unable to pay a material part of its
debts as they fall due.” 7  Plus, in a situation like this,
the banking regulators get to do a certain amount of ad
hoc stuff, and they do. (They got rid of the shareholder

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vote on the deal!) Zeroing the AT1s while preserving a

little value for the common does seem to have been done
in an ad hoc way; my point is just that it follows very
logically from the terms and function of the AT1s. 

People are very angry about this. Bloomberg News

reports:

The clauses that led to the bonds being marked to zero

aren’t common. Only the AT1 bonds of Credit Suisse
and UBS Group AG have language in their terms that
allows for a permanent write-down and most other
banks in Europe and the UK have more protections,
according to Jeroen Julius, a credit analyst at
Bloomberg Intelligence.  ...

“This just makes no sense,” said Patrik Kauffmann, a

fixed-income portfolio manager at Aquila Asset
Management, who holds Credit Suisse CoCos.
“Shareholders should get zero” because “it’s crystal
clear that AT1s are senior to stocks.”

The Financial Times adds:

“In my eyes, this is against the law,” said Patrik

Kauffman, a fund manager at Aquila Asset
Management, who invests in additional tier 1 (AT1)
bank debt.

He said it was “insane” that under the terms of UBS’s

takeover of Credit Suisse, AT1 bondholders were set to
receive nothing while shareholders would walk away
with SFr3bn ($3.2bn). “We’ve never seen this before. I
don’t think this would be allowed to happen again.”

Davide Serra, founder and chief executive of Algebris

Investments, said the move was a “policy mistake” by
the Swiss authorities. “They changed the law and they
have basically stolen $16bn of bonds”, he said in a
widely attended call on Monday morning.

I’m sorry but I do not understand this position!

The point of this AT1 is that if the bank has too little
equity (but not zero!), the AT1 gets zeroed to rebuild
equity! That's why Credit Suisse issued it, it’s why
regulators wanted it, and it would be weird not to use it
here. 

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Oh, fine, I understand the position a little. The position is

“bonds are senior to stock.” The AT1s are bonds, so
people bought them expecting them to get paid ahead of
the stock in every scenario. They ignored the fact that it
was crystal clear from the terms of the AT1 contract and
even from the name that there were scenarios where the
stock would have value and the AT1s would get zeroed,
because they had the simple heuristic that bonds are
always senior to stock. 

That's the trick! The trick of the AT1s — the reason that
banks and regulators like them — is that they are equity,
and they say they are equity, and they are totally clear
and transparent about how they work, but
investors assume that they are bonds. You go to investors
and say “would you like to buy a bond that goes to zero
before the common stock does” and the investors say
“sure I’d love to buy a bond, that could never go to zero
before the common stock does,” and the bank benefits
from the misunderstanding. 8

We talked about CoCos a few years ago due to a different

misunderstanding. CoCos generally are perpetual — they
never need to be paid back — but the bank is allowed to
repay them after, usually, five years (the “first call date”).
It is customary for banks to repay CoCos at the first call
date (because they are like bonds), but it is not required,
and in fact bank regulators go around saying that
banks shouldn’t make too much of a habit of repaying
them. “A bank must not do anything which creates an
expectation that the call will be exercised,” say the rules,
because the regulators do not want CoCos to be too bond-
like. 

And so one day four years ago Banco Santander SA

did not call its AT1s after five years, and the market
freaked out. “Santander’s decision is raising questions
about whether investors will start souring on AT1s across
the board,” said the Wall Street Journal at the
time, “which could force European banks to rethink a key
way in which they have cushioned themselves against
potentially catastrophic losses since the global financial
crisis.” I was unmoved. I wrote:

If the regulators think that AT1s are equity and the

investors think that they’re debt, someone is wrong,
and much better for the investors to be wrong! 

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Since then I have become very convinced that regulators

know how AT1s work, and that investors don’t, and that
this is good.

Anyway there are once again threats that this is the end
of the AT1 market, that no one will ever buy these
securities again, etc., threats that are familiar from the
Santander situation four years ago. Bloomberg:

Market participants say the move will likely lead to a

disruptive industry-wide repricing. The market for
new AT1 bonds will likely go into deep freeze and the
cost of risky bank funding risks jumping higher given
the regulatory decision caught some creditors off-
guard, say traders. 

That would give bank treasurers fewer options to raise

capital at a time of market stress, with the Federal
Reserve and five other central banks announcing
coordinated action on Sunday to boost dollar liquidity.

And my Bloomberg Opinion colleague  Marcus Ashworth:

The entire banking sector will end up paying for

Credit Suisse's myriad transgressions one way or
another. The repercussions of the Swiss takeover
structure may close off access to CoCos for all but the
strongest banks — the definition of which will come
under ever-closer scrutiny.

To be fair, most AT1s outside of Switzerland don’t work

like this — they tend not to be permanent write-down
AT1s — and so it is not clear why the Credit Suisse
writedown should affect the prices of other AT1s:

European regulators are rushing to reassure investors

that shareholders should face losses before
bondholders after the takeover of Credit Suisse Group
AG wiped the bank’s Additional Tier 1 debt. 

The clauses that led to the bonds being marked to zero

aren’t common. Only the AT1 bonds of Credit Suisse
and UBS Group AG have language in their terms that
allows for a permanent write-down and most other
banks in Europe and the UK have more protections,
according to Jeroen Julius, a credit analyst at
Bloomberg Intelligence. 

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It is just possible that the explanation is that AT1 investors

don’t read the terms of their securities? Anyway
European Union and UK banking authorities put out
statements saying in effect that they would never do what
the Swiss authorities did here, and that (in the Bank of
England’s words) “AT1 instruments rank ahead of CET1
and behind T2 in the hierarchy. Holders of such
instruments should expect to be exposed to losses in
resolution or insolvency in the order of their positions in
this hierarchy.” If you read that very closely, it does
not quite say that AT1 instruments can’t be written off in a
shotgun merger over the weekend that preserves some
value for the equity (not “resolution or insolvency”!), but
I guess there’s no reason to read it too closely.

Sadly, Bitcoin
A key idea in derivatives is no-arbitrage pricing. Let’s say
that the price of some metal is $100 today, and you think
it will be $300 in three months. What should be the price
of a futures contract on that metal with delivery in three
months? The wrong answer is $300. Let’s say you bid
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I mean, not free, I had to use some space in my garage. In

practice the futures price will differ from the spot price
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none of those reasons, generally, are “I think the price
will be higher in the future.” If you think the price will be
higher in the future, you can buy it now, and wait.

Similarly the price of Bitcoin for delivery in three

months is not exactly the same as the price of Bitcoin for
delivery today, again for reasons of leverage and interest
and contract mechanics and storage costs. 9 The CME
Bitcoin June 2023 futures contract price was about
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$27,975. You can, and people do, buy Bitcoin and sell
futures and pocket the $600ish difference to pay for
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this is just no-arbitrage pricing.

What if you are extremely confident that the price of

Bitcoin will be $1 million in three months? Here are some
trades you should not do:

https://archive.vn/Rd5WF 12/17
3/22/23, 10:36 AM UBS Got Credit Suisse for Almost Nothing - Bloomberg

Pay $1 million to buy a Bitcoin today, since it’ll be

worth $1 million in three months.

Pay $1 million for a futures contract to buy a Bitcoin in

three months, since that’s where the price will be
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Absolutely any variant on this trade that involves you

paying $1 million for a Bitcoin.

Here are some trades you could rationally do 10 :

Pay $1 million to buy 35 Bitcoins today.

Enter into futures contracts to buy 35 Bitcoins for $1

million in three months.

I just cannot emphasize enough how much better it is to

buy 35 Bitcoins for $1 million than to buy one Bitcoin for
$1 million. It is 35 times better. There is absolutely no
state of the world where paying $1 million for a Bitcoin
today is better for you than paying $1 million for 35
Bitcoins today. “I am confident that Bitcoin will go to $1
million”: Fine, great, buy 35 of them. “I am confident it
will go to $10 million”: Still, buy 35. “I am confident that
the US dollar will be worthless in 90 days and the only
value left will be in Bitcoin”: Okay but then you’ll be
much happier with 35 Bitcoin. 

On Friday, tech Twitter guy Balaji Srinivasan entered into

a Twitter bet in which he bet $1 million against 1 Bitcoin
that Bitcoin would be worth more than $1 million in 90
days. Noah Smith explains the bet here. If a Bitcoin is
worth more than $1 million, Srinivasan wins one Bitcoin,
which in this scenario is worth $1 million. If a Bitcoin is
worth less than $1 million, Srinivasan loses $1 million,
which in this scenario is worth, you know, (1) $1 million
and (2) more than a Bitcoin. In every scenario, Srinivasan
is strictly much worse off than if he had just bought 35
Bitcoins today.  

What? There are three possible explanations here:

1. He is kidding and not actually going to do this.

2. He is deeply confused about how money works.

3. He does know that this trade is

economically irrational, but he is doing it to draw
attention to himself and to Bitcoin, and to get other
people to buy Bitcoin as a hedge to the societal

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collapse that he is promising, because he already

owns a lot of Bitcoin and would like the price of
Bitcoin to go up.

Explanation 1 seems somewhat unlikely. (Yesterday his

counterparty tweeted “Since I’ve gotten a lot of
questions: yes the bet seems to be moving ahead
smoothly, money not quite in escrow yet but should be
tonight.”) I would have dismissed Explanation 2 out of
hand two weeks ago, but Srinivasan is a tech
entrepreneur and venture capitalist and the last two
weeks have somewhat undermined my confidence in the
financial sophistication of tech entrepreneurs and
venture capitalists with big Twitter accounts. It still feels
like a stretch.

Explanation 3 seems like the most plausible? Srinivasan

himself went on a Twitter Spaces on Saturday and said
well, look, everyone is pointing out that this trade makes
no sense and I should just buy Bitcoin, but “I’m doing it
to ring the fire alarm” and to “put out the bit signal.” He’s
doing it to draw attention to Bitcoin and get people to buy
it. “Hyperbitcoinization may come at you fast, so don't
wait on us to get Bitcoin,” he tweeted, in a thread about
the bet.

Is … that … uh … weird? The US Commodity Futures

Trading Commission regulates trading in Bitcoin
derivatives, and this bet is, among other things, a Bitcoin
derivative. And my impression is that US regulators do
not like it when people knowingly enter into uneconomic
derivative contracts with the goal of drawing attention
and driving up the price of the underlying commodity.
We have talked, for instance, about the case against Bill
Hwang, who is accused of market manipulation because
he kept buying swaps on stocks at prices higher than the
market price, or about the CFTC’s case against Don
Wilson (which the CFTC lost), accusing him of bidding for
futures contracts at the prices he thought they were
worth rather than at the market price. If you think that
Bitcoin should be worth $1 million and you buy it for
$26,000, that’s an economic trade. If you think that
Bitcoin should be worth $1 million and you noisily buy it
for $1 million, that’s arguably something else.

Things happen
Fed and Global Central Banks Move to Boost Dollar
Funding. First Republic Slumps to Record Low on
Downgrade, Bank Talks. Jamie Dimon Leading Efforts to
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3/22/23, 10:36 AM UBS Got Credit Suisse for Almost Nothing - Bloomberg

Craft New First Republic Bank Rescue Plan. BlackRock

explored rival Credit Suisse takeover bid. Before Collapse
of Silicon Valley Bank, the Fed Spotted Big
Problems. Apollo and Rivals Pushed Aside in Scrum to
Own a Piece of SVB. Silicon Valley Bank was warned by
BlackRock that risk controls were weak. The Dizzying
Array of Accounting Gimmicks Preventing Silicon Valley
Bank’s Failure From Affecting the Debt Ceiling.

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1 I am oversimplifying here in various ways. For

instance, of course a bank, like any other
company (but more so!), can have contingent
liabilities that are hard to measure: If a bank
is going to have to pay a big settlement for
doing some crimes, but hasn’t negotiated it
yet, you know that there is a lurking liability
but you don’t know how big it is. Also a big
international bank will tend to have large
derivative liabilities whose value depends on
market conditions: A $100 bank deposit is a
$100 liability, but a written credit default
swap is a liability whose value changes minute
by minute. Also there is DVA: Banks measure
some of their own liabilities at market value,
not face amount.

2 I am oversimplifying here in that the balance

sheet numbers are as of Dec. 31, and things had
changed by last week.

3 One fun one is that, over the weekend when the

deal price seemed to be $1 billion, crypto
mogul Justin Sun tweeted that he’d pay $1.5
billion. Wrong wrong wrong! If you have $1.5
billion, you can’t buy a $500 billion bank,
even if its equity value is only $1.5 billion.
You need the capital and financial capacity to
handle its $500 billion of assets.

4 The exact number is uncertain (to me and

perhaps even to UBS) because it has been
shrinking rapidly in recent days as depositors
left.

5 The rough math is CHF 531 billion of assets (as

of the Dec. 31 balance sheet) minus CHF 486
billion of liabilities is 45 billion of equity.
UBS paid CHF 3 billion for that equity, meaning
a CHF 42 billion discount. It also got to write
about CHF 16 billion of AT1 securities down to
zero (see the next section), for a total
discount of about CHF 58 billion. This does not
precisely equal the CHF 56 billion in the block
quote but what is a few billion dollars among
friends. “UBS benefits from CHF 25 billion of
downside protection from the transaction to
support marks, purchase price adjustments and
restructuring costs, and additional 50%

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downside protection on non-core assets,” says
its announcement.

6 For simplicity I am conflating *book* values of

assets and equity with *regulatory* values. In
fact things like “common equity tier 1 capital”
measure capital and (especially) assets
differently from financial accounting —
primarily, the capital ratios use risk-weighted
assets as the denominator, while I mostly use
market values of assets in the text — and I am
oversimplifying by treating them the same. But
this is all directionally right even if it’s
not numerically precise.

7 See pages 86-87 of the prospectus. The 7%

trigger is a “Contingency Event”; the
regulatory one is a “Viability Event.” The
prospectus also says (page 23): “In the case of
any such cancellation, FINMA may not be
required to follow any order of priority, which
means, among other things, that the Notes could
be cancelled in whole or in part prior to the
cancellation of any or all of CSG’s equity
capital.”

8 To be fair, there is a recent Credit Suisse

presentation suggesting that the AT1 ranks
ahead of the common. Perhaps Credit Suisse
never read the document either.

9 We have talked about Bitcoin futures pricing

before, and I have emphasized storage costs.
You don’t need to keep your Bitcoins in your
garage, but you do need to keep them on the
blockchain, or on a crypto exchange, and that’s
arguably much worse than your garage.

10 If you absolutely must get cute about it you

could buy some Bitcoin call options where you
pay, like, $15 today for the right to buy
Bitcoin at $500,000 in three months, but this
is much too cute and I am going to ignore it. I
used to sell options for a living, and the
lesson I took away from that is that almost
nobody who thinks they should be buying options
is right. In any case though a $500,000 three-
month Bitcoin call option is effectively free.

This column does not necessarily reflect the opinion of the

editorial board or Bloomberg LP and its owners.
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Get in touch
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